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GDP data – UK economy buoyed by beer and barbecues, but…

Laith Khalaf
IT

The ONS has published its preliminary estimate of GDP which shows the UK economy grew by 0.4 percent in the second quarter, compared to 0.2 percent in the first quarter. Contributor Laith Khalaf, Senior Analyst – Hargreaves Lansdown.

The services sector, which makes up the lion’s share of the UK economy and includes the retail industry, grew by 0.5 percent, its strongest reading since the back end of 2016. Construction also made a positive contribution to economic growth posting a rise of 0.9 percent, though that is still behind the trend of last year.

The UK’s manufacturing sector posted a second quarter of decline, falling back by 0.9 percent, and exerting downward pressure on the headline figure. ‘The UK economy has gathered momentum in the second half as the World Cup, the Royal Wedding and warm weather got consumers spending their pennies on beers and barbecues.

Not everyone makes hay when the sun is shining though, with energy suppliers seeing a 2.7 percent decline in production as the warm weather meant reduced demand for household heating.

In today’s economic climate 0.4 percent quarterly growth draws a small cheer from the crowd, though it would have been deemed below par prior to the financial crisis. In the ten years running up to the crisis, UK economic growth averaged 0.73 percent per quarter.

Indeed a rather less than encouraging assessment of the UK’s economic prospects can be found in the performance of the pound, which has slipped back below $1.30 against the dollar in the last week, despite a rise in UK interest rates. Fears over the potentially negative impact of Brexit clearly play a part in this, however we shouldn’t ignore the fact this particular coin is two sided, and dollar strength is a contributing factor alongside sterling weakness.

The IMF expects the US economy to grow by twice as much as the UK economy this year, forecasting 2.9 percent growth over the pond compared to 1.4 percent here. That means further US interest rate rises, while monetary policy in the UK remains in the slow lane by comparison. Currency investors can already earn an interest rate premium on holding dollars compared to pounds, and it looks like that differential is set to widen further.

A weak pound and strong dollar does have a tangible knock on effect on the UK economy, as we have seen from the wave of closures and profit warnings from the retail sector. Not everyone loses out from weaker sterling though, exporters and the domestic tourist industry should benefit, as do stock market investors, thanks to the international revenue streams of Footsie companies.

However oil and other commodities are priced in dollars, which means higher energy bills and petrol prices for UK consumers, against a backdrop of weak wage growth, so the squeeze we have seen on discretionary spending looks like it has a bit further to run.

All of this suggests the shackles are still on the UK economy, and that spells more or the same in terms of interest rate policy for the foreseeable future. There are also only a limited number of big sporting events, heatwaves and royal marriages which can bail the economy out.’

 Other comments on the GDP data (not associated with Hargreaves Lansdown)

Jacob Deppe, Head of Trading at the online trading platform, Infinox, may be of use:

“Growth in the second quarter may be stronger than the first, but in June the economy all but fizzled out. This doesn’t bode well for the third quarter, all the more so following last week’s interest rate rise.”

“Mark Carney and the Monetary Policy Committee will be a little red-faced given the weakness of the June data. The Bank of England has raised rates just as the economy, it would appear, is starting to lose momentum.”

“With the Pound taking a beating as the odds of a no-deal Brexit shorten, and the economy lacklustre in June, the decision to raise rates is looking increasingly ill-advised. The consumer continues to drive the lion’s share of growth in the economy and yet the consumer is under a lot of pressure, especially now that rates have risen.

It’s safe to say that another rate rise is now off the cards until 2019. The Pound’s response to the data said it all.”

David Lamb, Head of Dealing – Fexco Corporate Payments, comments: “The British economy is returning to type – for both good and bad. Good in that the rate of growth has notched up from the negligible to the anaemic.

“Bad in that Britain’s total reliance on its service sector continues. Decent growth in services has once again provided a get out of jail card for the economy, dragging overall growth for the quarter into positive territory and settling nerves that were jangled by the UK’s woeful start to the year.

“However there are several causes for concern. Growth was almost brisk at the start of the second quarter, but it slowed significantly in June, and household spending has plunged to its lowest level for six years.

“None of this bodes particularly well for the third quarter of 2018. And with the Bank of England now unlikely to raise rates again until well into next year, the Pound is looking very exposed.

“As fears of a no-deal Brexit mount, sterling is set to remain under pressure. It’s just a week since one Pound bought $1.30. That level seems like a lifetime ago, and the Pound is now hovering around a low not seen for over a year.”


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